Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/79499
Authors: 
Matthews, Nicola
Year of Publication: 
2013
Series/Report no.: 
Working Paper, Levy Economics Institute 758
Abstract: 
Walter Bagehot's putative principles of lending in liquidity crises - to lend freely to solvent banks with good collateral but at penalty rates - have served as a theoretical basis for thinking about the lender of last resort for close to 100 years, while simultaneously providing justification for central bank real-world intervention. If we presume Bagehot's principles to be both sound and adhered to by central bankers, we would expect to find the lending by the Fed during the global financial crisis in line with such policies. Taking Bagehot's principles at face value, this paper aims to examine one of these principles - central bank lending at penalty rates - and to determine whether it did in fact conform to this standard. A comprehensive analysis of these rates has revealed that the Fed did not, in actuality, follow Bagehot's classical doctrine. Consequently, the intervention not only generated moral hazard but also set the stage for another crisis. This working paper is part of the Ford Foundation project A Research and Policy Dialogue Project on Improving Governance of the Government Safety Net in Financial Crisis and continues the investigation of the Fed's bailout of the financial system - the most comprehensive study of the raw data to date.
Subjects: 
lender of last resort
global financial crisis
monetary policy
Fed lending rates
Bagehot's classical doctrine
Fed emergency credit and liquidity facilities
JEL: 
E4
E5
G1
Document Type: 
Working Paper

Files in This Item:
File
Size
839.05 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.